by Christy Bieber | Updated Sept. 14, 2021 - First published on Nov. 7, 2020
Many or all of the products here are from our partners. We may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Could an appraisal undermine your efforts to get a mortgage loan?
When you apply for a mortgage loan, many factors affect if you'll be approved and how much you can borrow. These include your income, credit score, and down payment. But they also include something completely out of your control: your home appraisal.
Lenders require an appraisal so a professional can determine what the home is worth. They want to make sure the home is valued highly enough that it can serve as sufficient collateral to guarantee the loan. Unfortunately, if your appraisal comes in too low, you could end up not being able to borrow the amount you need for the home you want to buy.
Secure access to The Ascent's free guide that reveals how to get the lowest mortgage rate for your new home purchase or when refinancing. Rates are still at multi-decade lows so take action today to avoid missing out.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
Mortgages are secured loans, and the home needs to be worth enough so the lender doesn't face financial loss if they have to foreclose.
In fact, lenders generally prefer that you make at least a 20% down payment so that they aren't loaning you the full value of the home. While you don't necessarily have to do this, you'll generally end up paying for private mortgage insurance (PMI) if you put down less than 20%.
The amount you can borrow, relative to what the home is worth, is called the loan-to-value ratio. But the appraisal of the home -- not necessarily the amount you're paying for the home -- determines the "value" when your loan-to-value ratio is determined.
For example, say you offer $400,000 on a home you like, and you plan to make an $80,000 down payment. If the home is appraised for $400,000, you'd have an 80% loan-to-value ratio and wouldn't have to pay for PMI.
If the appraiser determines the home is worth just $350,000, though, you have a problem. If you pay the $400,000 you offered and put down $80,000 as planned, you'd be borrowing $320,000 to buy a home that the lender views as being worth just $350,000.
Your loan-to-value ratio in this case would suddenly be 91% and you'd have to pay PMI. And in some cases, if your loan-to-value ratio is too high, the lender may not want to give you a loan at all.
If your home doesn't appraise for as much as you expect it to, you have some options:
Obviously, ending up with a low appraisal isn't ideal. But you do have options if this happens. You just need to make sure to explore them ASAP to overcome this big bump in the road to homeownership.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.